Fitch Ratings has affirmed the Long-Term Foreign and Local Currency Issuer Default Ratings of Embraer at 'BBB-' and its National Long-Term rating at 'AAA(bra)'. The Rating Outlook is Stable.
The rating says that Embraer's ratings reflect its competitive positions in the commercial and business jet markets; large backlog (USD19.5 billion) covering several years of sales; several promising defense programs; and the generally favorable environment in the global commercial aviation industry. Embraer's solid liquidity profile (mostly held outside Brazil) and its large export revenues combined with some offshore operating cash flow further support the 'BBB-' ratings.
Rating concerns include the financial impact of ongoing new aircraft development programs, including the transition to the E2 and the impact on orders and backlogs in the long term; significant competition in both the commercial and business jet markets; new entrants into the commercial jet market; low operating margins in several business segments; and the weak business jet market. Off-balance sheet contingent obligations, mostly related to the weak market for regional jets with 50 or fewer seats, are also a concern, but this is mitigated by guarantee deposits partly collateralizing the exposure.
Fitch expects Embraer's credit metrics through the end of 2018 will be weak for the rating category. Embraer must successfully deliver the E2 and KC-390 while improving margins and aircraft deliveries, or the ratings could come under pressure.
Several pending order campaigns and fleet reviews by key customers are items to watch over the next several quarters. The lack of scope clause changes in the United States market is a concern regarding the future of the E175 E2 model over the intermediate term.
The ongoing discussions with Boeing about a possible combination are not reflected in the ratings or affirmation. In December 2017, Embraer disclosed discussions with Boeing regarding a possible business combination. Fitch believes a combination would likely be a positive for Embraer's ratings, but potential outcomes cover the credit spectrum depending on the transaction's structure, so Fitch would be able to evaluate the ratings impact only after seeing the terms if a transaction were to occur.
There is no certainty an agreement will be reached.